Here's a revealing data point: older Americans are scared more of outliving wealth than of death itself.
Also, retirees who have constructed a nest egg have valid justifications to be concerned, since the traditional ways to plan for retirement may mean income can no longer cover expenses. Some retirees are now tapping their principal to make a decent living, pressed for time between decreasing investment balances and longer life expectancies.
The tried-and-true retirement investing approach of yesterday doesn't work today.
For example, 10-year Treasury bonds in the late 1990s offered a yield of around 6.50%, which translated to an income source you could count on. However, today's yield is much lower and probably not a viable return option to fund typical retirements.
While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of more than $1 million.
In addition to the considerable drop in bond yields, today's retirees are nervous about their future Social Security benefits. Because of certain demographic factors, it's been estimated that the funds that pay the Social Security benefits will run out of money in 2035.
So what's a retiree to do? You could cut your expenses to the bone, and take the risk that your Social Security checks don't shrink. Or you could find an alternative investment that provides a steady, higher-rate income stream to replace dwindling bond yields.
Invest in Dividend Stocks
Dividend-paying stocks from low-risk, high-quality companies are a smart way to generate steady and reliable attractive income streams to replace low risk, low yielding Treasury and bond options.
Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.
A rule of thumb for finding solid income-producing stocks is to seek those that average 3% dividend yield, and positive yearly dividend growth. These stocks can help combat inflation by boosting dividends over time.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
Cadence (CADE)
is currently shelling out a dividend of $0.28 per share, with a dividend yield of 3.67%. This compares to the Banks - Southeast industry's yield of 2.26% and the S&P 500's yield of 1.58%. The company's annualized dividend growth in the past year was 10%. Check Cadence dividend history here>>>
Canadian Imperial Bank (CM)
is paying out a dividend of $0.71 per share at the moment, with a dividend yield of 3.94% compared to the Banks - Foreign industry's yield of 3.33% and the S&P 500's yield. The annualized dividend growth of the company was 1.18% over the past year. Check Canadian Imperial Bank dividend history here>>>
Currently paying a dividend of $0.32 per share,
Manulife Financial (MFC)
has a dividend yield of 4.09%. This is compared to the Insurance - Life Insurance industry's yield of 1.61% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 2.18%. Check Manulife Financial dividend history here>>>
But aren't stocks generally more risky than bonds?
Yes, that's true. As a broad category, bonds carry less risk than stocks. However, the stocks we are talking about - dividend -paying stocks from high-quality companies - can generate income over time and also mitigate the overall volatility of your portfolio compared to the stock market as a whole.
An upside to adding dividend stocks to your retirement portfolio: they can help lessen the effects of inflation, since many dividend-paying companies (especially blue chip stocks) generally increase their dividends over time.
Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.
If you're thinking, "I want to invest in a dividend-focused ETF or mutual fund," make sure to do your homework. It's important to know that some mutual funds and specialized ETFs charge high fees, which may diminish your dividend gains or income and thwart the overall objective of this investment strategy. If you do want to invest in fund, research well to identify the best-quality dividend funds with the least charges.
Bottom Line
Pursuing a dividend investing strategy can help protect your retirement portfolio. Whether you choose to invest in stocks or through low-fee mutual funds or ETFs, this approach can potentially help you achieve a more secure and enjoyable retirement.
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Cadence Bank (CADE): Free Stock Analysis Report Manulife Financial Corp (MFC): Free Stock Analysis Report Canadian Imperial Bank of Commerce (CM): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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